eCommerce Lifestyle
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How to Profit with Free Shipping when Dropshipping

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​​It’s pretty simple—if you want to stay competitive, you have to offer free shipping.

So, how do you offer free shipping and still make a profit?

Find out in today’s episode of the eCommerce Lifestyle podcast! If you’re interested in learning the secret to staying profitable while offering free shipping, then hit the play button now. 

What's Covered in This Episode:


​Ways to increase net profit:

  • ​​Upcharge for expedited shipping
  • ​​Upcharge for white glove delivery

​Things to look out for:

  • ​Are your products expensive enough to support high shipping fees?
  • ​Are you getting the best shipping rates?
  • ​Suppliers ship more than you and get better rates
  • ​If you must ship on your own account, use a freight broker and shop around
If you liked today’s show, please subscribe on iTunes to The eCommerce Lifestyle Podcast! The podcast is also available on all major podcast players including, Stitcher and Spotify.

Links From This Episode:

This ​podcast is also available in video form. Click ‘Play’ below to start watching. Make sure to subscribe to our YouTube Channel for weekly updates and insights!

Transcript

Hey, what's up everybody? Anton Kraly here from eCommerceLifestyle.com and welcome back to the podcast. In today's episode, we're going to be talking about how we can actually offer free shipping on expensive and often large and heavy items and still be profitable because you probably heard me talk a lot about free shipping and the fact that we offer it because our competitors do and it's just what customers expect, but that doesn't actually mean shipping is free. Like we pay $0 for it. It just means instead of charging the customer for shipping, we are paying for the shipping costs ourselves. We're absorbing those costs. So the money's got to come from somewhere, right? We still got to be profitable and I'm going to talk to you about how we're able to do that in this podcast. So let's just use a random product for example.

Let's say we were selling surfboards, right? That's our niche. That's our product type. For sake of easy math because you know I'm not the best at that, let's just say that our average sale price for a surfboard when somebody buys it from us is $1,000. Meaning they pay us $1,000 for it. Okay, great. Well, what are our expenses? What money comes out of our bank after the thousand comes in? Well, we have the cost of goods sold. So I'll just put here cogs, for cost of goods sold. Let's say that's $500, which by the way it should be around there. Your cost of goods sold should be about half of what the actual sale price is on your website. Now the other expenses that you're going to have are your merchant fees. So this is the percentage that you pay for the ability to accept credit and debit card payments.

If you use Shopify payments which I recommend, it's just the easiest. They start you at 2.9%. So on $1,000 that would be about 30 bucks. It'd be 29, but I'm going to do 30 because math. So after that, what other expenses do you have? Right? Well, if you follow a Drop Ship Lifestyle and you know how it is we get sales. By the way if you don't, be sure to go to dropshipwebinar.com. D-R-O-P-S-H-I-P webinar.com for a full training on how we build these stores. We spend money to get traffic. I mean, it's that simple. We buy ads in a very targeted way so they're profitable, but that would be another expense that comes out of your thousand dollars, right? So I'm just going to put here ads, and let's say you're working on a 10X return on ad spend, which is very possible.

That would mean here your ad costs were $100 to get that thousand dollars sale. Then if you add up those expenses, that's $630. Subtract that from the thousand dollars that you got in the bank. Now your potential profit is $370, but we told the customer they were going to get free shipping and shipping is not here as an expense yet. So what happens? Well we get this order, money's in our account. We contact our supplier and we say, "Hey, supplier, ship out the surfboard to this person." They say, "Okay, here's your invoice," and the invoice has the $500 for the cost of goods and then the invoice has the shipping cost and the shipping cost will be the actual shipping cost. Again, we pay this. Now the reason that there's not a fixed number here that we can use is because with big and heavy items like surfboards for example, shipping costs can really vary widely based on where they're shipping from and where they're going to.

Whereas with lots of small little products that fit in tiny boxes, the difference in cost is like negligible. If it goes three states away or across the country, but with something big like this it might cost $50 to deliver locally and it might cost 120 to ship across the country. Right? So what we like to do is pick averages when we're doing our math and we're working out our potential profit and our estimated margins. Let's just say in this scenario, this shipped somewhere that was $100. So I'm going to put down here another deduction on our costs. This would be shipping, again it's free to our customer, but not to us. Then we are left with true net profit of $270, okay? So in the simplest way to explain it, this is how we offer free shipping and are still very profitable because in this scenario that is a 27% net profit on the thousand dollar order, okay?

The reason why you need to know your numbers, which I've really been hitting on in a lot of recent podcasts. I hope you're paying attention. If you're not, go back and listen again, is because the reason this works and the reason we can offer free shipping is because in between here, this is sale price that we sell it for. In between sale price and in between cost of goods sold, there's enough money to work with that we can have these expenses and still make money.

Now let's look at this a different way, right? Let's say instead of selling that thousand dollars surfboard, we said, "Oh, you know what? I found this new supplier. They sell these surfboards and they're 500 bucks." So I'm going to try to sell them and I'm going to put a bunch of paid money into traffic, a bunch of money into paid ads. So let's say 500 was the sale price and let's say your cost of goods sold, let's say it was even less than half. Let's say it was $200, right? You had a really good deal here with your supplier. So $200 is your cogs. We'll just do line by line so I don't have to rewrite everything. Your merchant fees here would be 15 bucks. Let's say you spent half of what cost you to get the a thousand dollars sale? So let's say your ad costs were only 50 bucks.

Now let's look at this a different way, right? Let's say instead of selling that thousand dollars surfboard, we said, "Oh, you know what? I found this new supplier. They sell these surfboards and they're 500 bucks." So I'm going to try to sell them and I'm going to put a bunch of paid money into traffic, a bunch of money into paid ads. So let's say 500 was the sale price and let's say your cost of goods sold, let's say it was even less than half. Let's say it was $200, right? You had a really good deal here with your supplier. So $200 is your cogs. We'll just do line by line so I don't have to rewrite everything. Your merchant fees here would be 15 bucks. Let's say you spent half of what cost you to get the a thousand dollars sale? So let's say your ad costs were only 50 bucks.

It's 265 minus 500. You're left with 135. Okay, so now instead of having 370 to play with, you have 135 to play with. Now let's say your shipping costs because the item is the same size, right? It's just the cheaper surfboard. The item still costs $100 to ship because it's going from the same location to the same location and the box is the same. So nobody cares how much you've sold it for. Well here you have $35 net profit. Now I'm not good enough with math to know $35 into 500 what percentage margin that is, but I'll tell you it's not worth my time to do all the work of getting the sale, building the website, getting the traffic to make $35 per order. Also as you might have imagined or picked up on so far as we've went through this, is there are some other expenses that you will have. Your fixed expenses like $29 a month to Shopify.

If you have virtual assistants you work with, if you have apps you use. So if you're only going to have this little bit of potential money to make, it's not worth it. There's not enough money in it. You should do something different. What you should do different to make money by offering free shipping and to profit with it is make sure that money is built in when you are looking at your cost of goods and the sale price. Now, if you're selling small products that ship for $20 no matter where they go, then you don't need as big of a gap here obviously. With these big heavy items, we do get the question regarding this because that's what we sell a lot of. How are you able to do it for free? This is how, make sure you have the spread here.

Now with that being said, I want to give you some extra tips here and talk to you about how you can actually turn this hypothetical 270 bucks into a lot more and be able to bump that margin up. Now you could do that with the small $35 net profit too, but don't because this should be like icing on the cake. This should be an addition to. This shouldn't be what you have to use to be profitable. So the first thing you should do is offer shipping options when the person gets to the cart. So as the person's buying your thousand dollar surfboard there in their cart, it has by default selected free shipping like you promised them. Maybe it says free shipping three to five business days. Maybe there's another option that says free shipping one to two business days, and that one is an extra 50 bucks.

Okay and if they want that, they can pay an extra 50 for expedited shipping, fast shipping, whatever you want to call it. Let's put fast. Then your margin here is now $320 or 32% of the thousand dollars sale. Big difference because that's pure profit. Now the reason you can do this, maybe you should find out first, is depending on the relationship with your supplier. If your supplier tells you, "Hey if you submit orders to us before 5:00 PM, they're going to ship out the next day." Then all you have to do if you charge an upcharge for fast shipping is make sure you send the order to the supplier the second it comes in so it gets out fast. By doing that, the customer could be able to feel comfortable. They're going to get the item quicker. They could pay extra, it'll go straight to your bottom line. You will instantly pick up five points on your profit margin.

It's that simple. Now let's talk about one more way that you could make more money still from shipping while offering it for free. This one doesn't apply so much to the surfboards as it would to something big and bulky that gets set up in somebody's home. So like furniture or kitchen stuff or I don't know, a grill, backyard accessories. What that is, is to offer white glove shipping as another service, as an upcharge. Now with normal shipping and the way it works is the box comes to the door. Here's your stuff, have a nice day. If people are buying really expensive items from you, let's just say it's I don't know, a gazebo for the backyard and you offer a service on your website which is white glove delivery, where the delivery crew will bring the gazebo into the person's backyard.

They'll take it out of the box. They'll even assemble it for them. They'll take away all the garbage. Well, that's a service you can easily add maybe an extra 300, 400 bucks onto the price for and that's something maybe you're paying an extra two or 300 to the white glove delivery company. So if you're going to go that route, do your research. There's tons of different concierge services out there that offer white glove delivery. You'll just have to get prices for your specific niche and product type and that's something you can add in the checkout process as well. Not something everybody's going to take, not where you should make your money. Again, your money should be built in by default. Like I was showing you here with the 270 and everything on top of that, whether somebody is paying for expedited shipping or white glove shipping. That's icing on the cake, it's more net profit for you and it's a way to have an extremely profitable business while offering free shipping.

Remember, this is the key though. Do not sell products where there's no spread in between cost of goods sold and your sale price. So guys as always, I hope you found this episode helpful. If you did, please go over to Apple Podcasts, leave a review, just search for eCommerce Lifestyle with Anton Kraley. It'll pop right up. Really appreciate it. It helps me get the word out. As always, if you want my free training on how we build highly profitable semiautomated online stores, go to dropshipwebinar.com and I will see you over there. Thank you everybody.

  • Sandy says:

    Hi Anton,
    After listening to this episode and going through my numbers, I am feeling rather defeated. I went through all the steps in your Dropship Lifestyle Course to choose my niche and it met all the criteria. My store is in its 2nd year of operations. My average order value is $300 to $400, I have mostly gold suppliers and I am grossing $8000 a month in sales. However, my net profit is close to nothing after I subtract all my costs. I feel like I am in the $500 surfboard category instead of the $1000 surfboard category. Does this mean I chose the wrong niche?? Or is my issue somewhere else? Are you able to expand a bit on what to do if you find yourself in the $500 surfboard category??
    Thank you kindly,
    Sandy

    • Anton Kraly says:

      Hi Sandy,

      Are there are any products that are already on your store (or available in your niche) that are in that higher-price range?

      If yes, my advice would be to focus all of your ad spend on those products. Then rely on organic (free) traffic for the sale of the less expensive items.

      • Sandy says:

        Yes, there is! Okay, that is great advice. Thank you Anton.

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